Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Zhejiang Cfmoto PowerLtd's (SHSE:603129) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Zhejiang Cfmoto PowerLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.21 = CN¥1.3b ÷ (CN¥14b - CN¥7.2b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Cfmoto PowerLtd has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 5.7% earned by companies in a similar industry.

In the above chart we have measured Zhejiang Cfmoto PowerLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Cfmoto PowerLtd .

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Zhejiang Cfmoto PowerLtd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 497%. So we're very much inspired by what we're seeing at Zhejiang Cfmoto PowerLtd thanks to its ability to profitably reinvest capital.

Another thing to note, Zhejiang Cfmoto PowerLtd has a high ratio of current liabilities to total assets of 54%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, Zhejiang Cfmoto PowerLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 369% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Zhejiang Cfmoto PowerLtd does have some risks though, and we've spotted 1 warning sign for Zhejiang Cfmoto PowerLtd that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.